INCOTERMS EXPLAINED: EVERYTHING YOU NEED TO KNOW

 Incoterms or International Commercial Terms are a series of pre-defined rules, of voluntary use, relating to international commercial law. An incoterm represents a universal term that defines a transaction between importer and exporter so that both parties understand the tasks, costs, risks, and responsibilities, as well as the logistics and transportation management from the exit of the product to the reception by the importing country. Incoterms are all the possible ways of distributing responsibilities and obligations between two parties. It is important for the buyer and seller to pre-define the responsibilities and obligations for the transport of the goods. All best shipping company in India incorporate the Incoterm rules which forms a crucial part of any agreement between buyers and sellers by dictating who will pay for loading and unloading costs, customs export procedures, insurance, import costs, and more. By understanding the Incoterm rule defined in a contract, buyers and sellers can get a firm grasp on their costs and, ultimately, their margins. 

Here are the main responsibilities and obligations:

• Point of delivery: here, the incoterms defines the point of change of hands from seller to buyer.
• Transportation costs: here, the incoterms define who pays for whichever transportation is required.
• Export and import formalities: here, incoterms define which party arranges for import and export formalities.
• Insurance cost: here, incoterms define who takes charge of the insurance cost.

 

Incoterms were created by the International Chamber of Commerce (ICC) in 1936 and thanks to their usefulness they were rapidly used in all the world. Nowadays Incoterms are accepted internationally by governments and public administrations,

In any business, all different parties look after their own benefit, and that’s why it’s so important deciding who will be responsible for what in any trade. It can also be really complicated and start conflict and confrontations between said parties.

Incoterm were, as we’ve said, created with the objective to set a unified criteria regarding the responsibilities and obligations to which seller and buyer of goods agree beforehand so  they know at all times who must bear with what costs or risks.  This helps reduce confrontation and misunderstandings between traders and in turn minimize trade disputes and litigation. Furthermore, a good knowledge of Incoterms can help save money derived from, for example, delays or mishandling of the goods.

Classification of Incoterms

The Incoterms are divided into four principal categories: E, F, C and D.

Category E (Departure), which contains only one trade term, i.e. EXW (Ex Works).

Category F (Main Carriage Unpaid), which contains three trade terms:

• FCA (Free Carrier)

• FAS (Free Alongside Ship)

• FOB (Free on Board)

Category C (Main Carriage Paid), which contains four trade terms:

• CPT (Carriage paid to)

• CIP (Carriage and Insurance paid to)

• CFR (Cost and Freight)

• CIF (Cost, Insurance and Freight)

Category D (Arrival), which contains three trade terms:

• DAP (Delivered at Place)

• DPU (Delivered at Place Unloaded)

• DDP (Delivered Duty Paid)

The four above-mentioned categories can also be classified as per the means of transportation:

• Incoterms for any mode of transport: EXW, FCA, CPT, CIP, DPU, DAP and DDP;

• Incoterms only for sea and inland waterway transport: FAS, FOB, CFR and CIF.

Each Incoterm contains a set of rules of interpretation for the obligations of both the seller (A1-A10) and the buyer (B1-B10) covering the following issues:

• A1/B1 – General Obligations,

• A2/B2 – Delivery,

• A3/B3 – Transfer of risks,

• A4/B4 – Carriage,

• A5/B5 – Insurance,

• A6/B6 – Delivery/transport document,

• A7/B7 – Export/import clearance,

• A8/B8 – Checking/packaging/marking,

• A9/B9 – Allocation of costs, and

• A10/B10 – Notices.

Basic Features of Incoterms Used for All Modes of Transport

EXW Incoterm (Ex Works)

The seller makes the goods available at its location, so the buyer can take over all the transportation costs and also bears the risks of bringing the goods to their final destination.

 

FCA Incoterm (Free Carrier)

The seller hands over the goods into the disposal of the first carrier. After the buyer takes over all the costs, the risk passes when the goods are handed over to the first carrier.

CPT Incoterm (Carriage Paid to)

Carriage Paid To (CPT) is an international commercial term (Incoterm) denoting that the seller incurs the risks and costs associated with delivering goods to a carrier to an agreed-upon destination. With multiple carriers, the risks and costs transfer to the buyer upon delivery to the first carrier. The CPT Incoterm is versatile as it can be used for all modes of transportation and may also be used where more than one mode of transport is employed by any shipping freight forwarding companies.

 

CIP Incoterm (Carriage and Insurance Paid to)

The seller pays for the carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

DAP Incoterm (Delivered at Place)

DAP simply means that the seller takes on all the risks and costs of delivering goods to an agreed-upon location. This means they are responsible for anything associated with packaging, documentation, export approval, loading charges, and ultimate delivery.

 

DPU Incoterm (Delivered at Place Unloaded)

With the DPU Incoterm, the seller assumes all costs and risks until the goods are unloaded at the agreed named place at destination. In this case, the buyer is responsible for import customs formalities. DPU can apply to any mode of transport or multiple modes of transport.

 

DDP Incoterm (Delivered Duty Paid)

The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination.

 

Basic Features of Incoterms Used for Sea and Inland Waterway Transport

 

FAS Incoterm (Free Alongside Ship)

The seller must place the goods alongside the ship at the named port, the risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all the costs from that moment on.

 

FOB Incoterm (Free on Board)

The seller must load the goods on board of the ship, nominated by the buyer. Cost and risk are divided when the goods are actually on board.

 

CFR Incoterm (Cost and Freight)

Seller must pay the costs and freight to bring the goods to the port of destination. Although the risk is transferred to the buyer when the goods are loaded on the ship.

 

CIF Incoterm (Cost, Insurance and Freight)

It’s exactly like CFR except that the seller must in addition procure and pay for the insurance.

Conclusion

The use of Incoterms in international trade is a widespread phenomenon, and disputes frequently arise due to confusion concerning them. Prior to inserting an Incoterm into a contract, it is essential for the parties to make sure that the Incoterm meets all their expectations and needs regarding the following issues:

• Is transport to be made by sea/inland waterway means or not?

• Who should bear the majority of the risk of loss/damage to the goods – the seller or the buyer? At what point in time in the delivery to the place of destination should risk be shifted from the seller onto the buyer?

• Is there a need to use the services of a carrier? If so, who should have an obligation to conclude a contract of carriage – the seller or the buyer?

• Should the seller be responsible for the unloading of the goods?

• Is there a need to subscribe an insurance contract?

 

Shipments can face problems without the correct incoterm so it’s really important to think carefully about which one is appropriate. Failure to understand incoterm definitions leads to problems throughout the supply chain. For example, logistics costs could increase, the terms may not match the requirements of the buyer or seller or the buyer or seller may not be able to comply with the incoterm. Top freight forwarding companies in India use Incoterms for the preparation of international freight forwarding of goods and cargo by the freight forwarders worldwide for commercial purposes.